Tax havens are not the devil and here’s why

Tax avoidance is in the headlines again. Yet another leak has befallen the glamorous nest of international tax havens: cue outrageous posturing from the Corbynista clan manufactured in their Labour London HQ rented from a tax-exempt offshore trust in Jersey. It is true that public resources are stretched, and it is easy to scapegoat corporations much the same as some scapegoat migrants. Indulge me however, if you would, and allow me to present a different, more optimistic, way to view the situation.

It is important to stress that the recent Paradise Papers as well as the older Panama Papers have not exposed illegal activity. Tax avoidance, more kindly referred to as simply tax planning, is completely legal. It involves structuring one’s finances efficiently to owe less to the state and keep more money in one’s own bank to invest. Tax evasion is the crime and it involves one concealing money which one legally owes to the state. People often think that tax avoidance is limited to greedy fat cats, but the simple fact is that we all do it. We all recognise the need to contribute to society; we also do not want to pay more than is due. We avoid tax when we invest in pension funds; in ISAs, and in National Savings accounts. John McDonnell, the Labour Shadow Chancellor, has a pension fund for Westminster City Council which invests in Guernsey which is, you guessed it, a tax haven. The tax system in the United Kingdom is one of the most convoluted in the world. Corporation tax in and of itself is unfit for purpose. To tax corporate profits is to deny them the resources for investment and growth. It is no coincidence that, as recent reductions in corporation tax have occurred, revenue from the tax has increased rather than decreased as companies have expanded. Ideally, corporation tax should be abolished altogether; the tax competition from tax havens serves to pressure the government into making the UK more appealing to business. At the very least, a nifty tax tweak called ‘full expensing’ which provides rebates on corporation tax paid according to levels of demonstrative reinvestment would be a boon to the economy.

There is a peculiar stench of imperialism on this issue too. Targets of rhetoric on the matter have included places such as Bermuda and the Cayman Islands where Her Majesty the Queen’s Duchy of Lancaster directed some investments; apparently it is scandalous for a functionary in Whitehall to invest in places still loyal to the Crown. Such places still fall within the Commonwealth, but the claim that they must conform to our sensibilities for our supposed benefit should make any democrat slightly uneasy. They benefit from their attractive tax systems and it is not our place to punish them for that. Taxation should never be punitive, and it should always be as low as possible. The notion that untaxed earnings somehow disappear from the economy is absurd. Reinvestment in companies leads to expansion which creates more jobs. More money in the pockets of people leads to higher purchasing power and higher demand for goods and services which boosts the whole economy. This boost to the economy creates tax revenue which can be directed toward public services which desperately need it. By starving enterprise in its crib or by depriving corporations of the funds to reinvest, the money available for public services will decrease.

With the uncertainties brought about by Brexit, I worry that by searching for a bogeyman in the form of tax planning, Britain might discourage the fruits brought about by aspiration and enterprise, which is the foundation of the prosperity of our economy and our society. We must be wary of those who point to fat cats and corporations as the source of our ills much the same as we are wary of those who point to migrants. What is good for business is good for Britain.

One comment

“it is easy to scapegoat corporations much the same as some scapegoat migrants.” Quite a crass comparison. It seems to me there is a profound difference in the power relationships existing in these two cases.